Bloomberg Unwittingly Vindicates Stigler

In a recent Bloomberg Government article, Cheryl Bolen pushes back against what she perceives to be two myths of the much-touted Trump deregulatory agenda: that deregulation is in fact occurring, and that repeal of existing regulations actually helps businesses. I shall address these in reverse order, first demonstrating that most regulation is a net drag on the economy, and then mustering evidence to the effect that the Trump administration’s deregulatory push is real indeed.

Do Regulations Hurt Businesses?

Celebrating deregulatory efforts concedes the premise that the typical regulation is on net more costly than it is beneficial. Cheryl Bolen makes the argument that such celebrations are mistaken: while businesses do benefit from greater predictability, they benefit hardly at all from the repeal of existing regulations.

So, she contends, Trump-boosters are right to “atta-boy” the administration for its relative dribble of new regulations compared to the first two years of the two prior administrations. She cites OMB data which illustrates the comparative paucity of new rules under Trump, data which is corroborated by the Mercatus Center’s RegData project:




It’s worth noting that merely summing the number of new rules, as well as counting the total words and “restrictive words” therein, are very crude proxies for measuring the economic impact of such regulatory activity. Nixon’s Executive Order 11615, imposing a 90-day freeze on wages and prices, was massively distortionary despite its Hemmingway-esque brevity (clocking in at just over 1,000 words, compared to the median rule in 2016 at over 20,000 words.)

But however measured, spaying the fecund federal register promotes growth via a variety of mechanisms. If the probability of an over-zealous bureaucrat conjuring up a confiscatory rule at some point down the road (see Richard Epstein’s work on regulatory takings) is reduced, this means that not only will businesses be able to more accurately project the long-term returns to their investments (less forecasting error) but that the expected returns will also be higher. This means more investments and projects will profitably clear the hurdle rate and will be undertaken.

But, Bolen argues, repealing existing regulations is useless: “most businesses get little or no benefit from eliminating existing rules.” The question, of course, is which businesses are we talking about? First, a general point: all else equal, no business wants to spend money complying with regulations. Lawyers, it turns out, are expensive. But is it possible that incurring such compliance costs might ultimately redound to the benefit of the firms in a given industry, leading them to support such regulations despite these costs? Call it what you want: bootleggers and Baptists or public choice theory, but there is a well-established school of economic thought which holds just that.

While the justificatory rhetoric for a particular regulation might come from consumer advocacy groups concerned about safety or environmental groups fretting over carbon emissions (akin to the Baptists supporting prohibition on behalf of mens’ souls), a more mercenary motivation on the part of the firms themselves (the bootleggers) may be lurking in the background. Insofar as regulations raise the fixed costs of doing business- the price of admission for competing in the industry at all, even if it does not entail continuing compliance costs – regulations serve as an artificial barrier to entry, keeping marginal would-be entrants out of the industry. This is a boon to the incumbent firms: the reduced competition more than compensates them for the additional fixed costs of regulatory compliance. Moreover, it’s a boon to the biggest incumbent firms, who are able to spread those fixed costs over far larger revenues.

So, when Bolen claims that “most businesses get little or no benefit from eliminating existing rules,” she is ignoring those would-be businesses who are prevented from entering the industry at all due to regulation. In fact, she goes on to say as much herself! Squint your eyes and perform a gestalt switch on the following paragraph and you’ll see George Stigler himself staring back at you:

Ongoing costs typically are minimal once a regulation is in place and businesses have absorbed the initial costs of compliance. Rules also set the standards for new entrants, so cutting a rule later could give newcomers an advantage over established businesses that are meeting the higher standard.

Here, to “give newcomers an advantage” is the equivalent of “leveling the playing field going forward” by lowering the standards such that smaller, newer firms can enter the industry and compete.  And if “ongoing costs” are “typically minimal” once a regulation is in place (fixed-costs), this does not constitute a disadvantage for incumbents vis-à-vis newcomers. Unless of course, the prior regulations distorted firms’ incentives, causing them to undertake path-dependent malinvestment, in which case this is a strong argument against imposing those regulations in the first place.

Let’s use this framework to analyze the next paragraph:

Automakers have been critical of the administration’s proposal to revoke California’s legal authority to set emissions standards for new automobiles as part of its proposal to cap mileage requirements at a 37 miles per gallon fleet average after 2020, instead of raising them to about 47 mpg under rules adopted by the Obama administration.

We see both ill-effects of regulation on display. Incumbent automakers would like to maintain these higher, Obama-era standards because 1) it makes entering the industry more costly, thereby serving as a regulatory moat against insurgent firms, and 2) these emission standards were achieved not in response to consumer demand, wherein consumers would be happy to pay the higher prices that such standards entail, but rather were a response to the distortionary non-market incentives generated by the EPA.

Finally, regulation can impose an economic burden above and beyond the direct costs of compliance and its mitigating effects on competition. By proscribing novel business practices and products, many regulations make innovation either more expensive or outright impossible in certain industries. While measuring compliance costs are relatively straightforward, figuring out the cost of foregone innovations is an impossible task- just imagine if the Department of Labor had prophylactically killed the Uber business model with the stroke of a pen: we wouldn’t know what we’re missing.

Is Trump, in fact, de-regulating?

On the first “myth”, Bolen notes that:

Few existing regulations have been rolled back since the initial months of the task force efforts, when 14 Obama-era rules were rescinded by May 2017 using the Congressional Review Act and dozens more changes were made to reduce compliance burdens.

This merely highlights the inadequacy of the Congressional Review Act (CRA) as a statutory prophylactic against excessive regulation. The CRA gives Congress 60 days within which to pass a joint resolution of disapproval overturning a newly promulgated regulation. The problem? In an era of divided government, the president can shield his prolific bureaucrats from the CRA with a veto. It wasn’t until Trump replaced Obama that the occupant of the Oval Office was willing to sign such resolutions into law, catching only the tail-end of the Obama administration’s historic regulatory output. For critics of the administrative state, the CRA is impotent to restrain unilateral executive action. Proposed alternatives, such as the REINS Act, would shift the onus from “allowed until Congress disapproves with the President’s acquiesce” to “disallowed until Congress approves with the President’s acquiescence” would dramatically raise the hurdle that new regulations would need to clear, instituting a de facto Congressional veto.

Next, she points to the fact that federal courts are thwarting portions of Trump’s deregulatory agenda:

Agencies seeking to delay effective dates of rules over the last two years have lost in court at an unprecedented rate, and recent proposed cuts to a core group of major environmental regulations are likely to be challenged as well. These include a rewrite of a rule governing emissions from power plants, a rule defining federal jurisdiction of groundwater, and fuel economy standards for passenger cars.

Indeed, among the 31 relevant cases so far litigated in federal court, the Trump administration has prevailed in a grand total of two of them. Yet it’s worth noting that these cases overwhelmingly concern agencies attempting to delay the implementation of rules promulgated in the latter years of the Obama administration. In most of the cases cited, the administration lost on the grounds that such delays were improper attempts to circumvent the notice-and-comment requirements specified in the Administrative Procedures Act.

This presents a blinkered view of the Trump administration’s deregulatory efforts, however. The author acknowledges Executive Order 13771, which imposes a 2-1 (2 out, 1 in) rule on most non-independent federal agencies. Her contention is that this EO has been largely ignored, and she loosely cites that “charts are often filled in with ‘No Target Established’ or ‘TBD’” at” four of the most active regulators”.

Thankfully, we have the indefatigable Wayne Crews of the Competitive Enterprise Institute, who has composed a far more comprehensive picture for us. EO 13771 now adds a new variable to the regulatory metadata: whether or not OIRA deems a rule to be “Deregulatory” or “Regulatory” (for EO-compliant agencies). This is a big boon to quantitative researchers, and I myself am using this new variable in a forthcoming analysis. Moreover, Mr. Crews tabulates that federal agencies in FY2017-2018 have either completed or are actively formulating 671 deregulatory rules (vs. 257 regulatory). Among “economically significant” rules, the ratio of deregulatory-to-regulatory actions is 4-1.

In summation: the Trump administration should be applauded for its deregulatory efforts, but only a statutory fix such as the REINS Act will prevent subsequent administrations from over-regulating when they feel so-inclined. Why should we applaud deregulation? Because, as I’ve attempted to demonstrate, regulation not only distorts investment decisions and is costly to comply with, it also throws sand in the gears of the engine of creative destruction.